Value investing still delivers

Stocktake:The basics of value investing are well known, dating back to Benjamin Graham in the 1930s. Far from being dated, however, Graham’s principles continue to deliver stellar returns, according to investment manager Tobias Carlisle.

Carlisle (see greenbackd.com) notes that Graham tweaked his ideas towards the end of his life, proposing a less elaborate approach to investing, namely: create a portfolio of at least 30 stocks with price-earnings ratios below 10 and debt-to-equity ratios below 50 per cent. Hold these stocks until they return 50 per cent or else sell within two years.

Over the previous 50 years, Graham said, returns averaged 15 per cent a year.

Stock screens are more sophisticated these days, but it still works.

In his new book, Quantitative Value, Carlisle notes that the strategy would have returned 18 per cent annually between 1976 and 2011, compared to 11 per cent for the SP 500.

Bearish outlook for the year

Japan’s Nikkei soared 23 per cent in 2012, with almost all of those gains coming in the last six weeks of the year.

Famously bearish Swiss hedge fund manager Felix Zulauf, who predicted the global financial crisis, reckons the index has “at least another 20 per cent upside” in 2013.

The Nikkei bull market “could do more and last longer”, Zulauf said last week. “Nobody owns Japanese stocks,” he added, noting that the market was 75 per cent below its 1989 peak.

Zulauf, who also called the recent bottom in the Chinese market, argued that the Shanghai index also has “another 20 per cent to go”.

However, Zulauf’s bearish macro outlook remains unchanged. The current market “honeymoon” will end in mid-2013 or 2014 as investors realise the “improving fundamentals” are a mirage; the commodity boom is over, the current uptrend is “temporary and more for traders, not investors”.

And while the euro may yet hit $1.40, it will collapse to $1 next year “when the markets see more trouble and yields rise again on the sovereign debt of the peripheral countries”.

Fiscal cliff relief may yet prove fleeting

“The world is overbought,” Bespoke Investment Group noted last week, with 25 of 30 national indices in technically overbought territory.

In the US, 90 per cent of stocks were trading above their 50-day average, the highest percentage in 15 months.

The gains have been accompanied by a collapse in volatility. The Vix, or fear index, fell by 39 per cent in a single week, the largest fall since its launch in 1990.